Trading Barbs: After Trade Agreement, Political Questions Remain In Canada

By Rob LeForte

Vol. 84 No. 11 November 2018

This year has been a far cry from the best-laid plans set by Minister Chrystia Freeland and the governing Liberals when she was elected in 2015. Canada and the United States have been seemingly deadlocked for months over details in the renegotiation of the North American Free Trade Agreement (NAFTA). The rhetoric away from the negotiating table only heated up, which led some to believe the deal was days away either from completion or from being dissolved. Luckily, the outcome was positive and a trilateral agreement will remain in place (USMCA).

As Canada’s Minister of Foreign Affairs, Chrystia Freeland has occupied an almost nightly presence in national and regional media that competes with the level of exposure given to Prime Minister Justin Trudeau. The pressure of balancing private negotiations and public scrutiny is immense, not to mention the need to respond to other issues on the global stage. Irritants, like the looming threat of automotive tariffs and new levies on aluminum and steel, have amplified the tension between two countries with a wide array of interdependent industries. Not least of which is the construction sector.

Which raises the question for equipment distributors: What are we fighting to save?

Construction starts and major infrastructure projects are not just drivers of economic growth; they are also the by-products of a well-functioning economy. When families can build new houses, governments can build new schools, and businesses can expand their operations and footprints, more equipment is needed to support that growth. When governments respond by reducing barriers to doing business and letting more goods flow freely across borders, so much the better. However, when consumer confidence dips and belt-tightening grips boardrooms and capitol buildings, the projects that keep job sites busy start to languish.

This summer, a Bloomberg News poll showed that Canadians’ expectations for economic growth were at a two-year low. That negative outlook was fueled by concern that Canada was being left out of negotiations while the U.S. and Mexico completed negotiations of their own bilateral deal. It has been widely reported that the negative effect of failing to reach a deal would be much worse for all economies than the tariffs levied by the U.S. and then by Canada in response, covering $16 billion in goods that are exchanged annually between the two countries. To underscore that point, in September, the heads of the U.S. Chamber of Commerce, the Business Roundtable, and the National Association of Manufacturers urged the U.S. Trade Representative Robert Lighthizer to maintain the trilateral structure of NAFTA. They got their wish, but attention will now turn to rejecting the tariff-happy approach of the executive branch that still has Canadian businesses reeling and global investors concerned about trade wars leading to an economic slowdown.

During negotiations, the White House set multiple deadlines to get an agreement in principle that could be taken to Congress for approval. At the same time, Canada called the bluff of many deadlines that seemed to carry little weight. Before midnight on September 30, all three parties had a breakthrough.
Canada’s negotiating strategy required that the team work closely with supportive governors in a wide range of state capitals and members of Congress in states where millions of jobs depend on trade with this country. They expect those officials in the U.S. to hold the executive branch accountable for ensuring the deal works for both sides. A protracted negotiation would have been seen as a failure by the government to negotiate effectively, but they have dodged that criticism for now.

Since mid-September, Conservative opposition leader Andrew Scheer has taken to calling the past few months Justin Trudeau’s “Summer of Failure.” He pointed to the rocky negotiations as a key concern for voters in industries that are already being impacted by tariffs, and knows that if the U.S. implemented auto tariffs Canada could find itself in a recession less than a year away from the next federal election. With the new USMCA in place, there is more than a chance that steel and aluminum tariffs that have hurt businesses on both sides of the border could remain in place, dragging down growth for the benefit of some large mills in the United States that have seen profits rise. If those measures stay in place, what would not be good for the economy may lead to a clearer path to victory for the Opposition north of the border.

At the same time, the Conservatives are gathering ammunition domestically to show that Trudeau and his team just don’t get it when it comes to helping businesses succeed. Earlier this year, the government purchased the Trans Mountain Pipeline expansion project for $4.5 billion and was immediately confronted by the fact that the National Energy Board’s approval was rejected by the Federal Court of Appeal. The court cited a lack of sufficient consultation, and the National Energy Board has pledged to have its examination and recommendation under new terms completed by February 22, 2019. While the first stumbling block for this project looks bad for the government, any further delays will signal a major boondoggle. On top of this, the project is already causing the government to spend political capital in British Columbia, where election wins could be harder to come by and the Conservatives and NDP are focused on making gains.

For Scheer and the Opposition, Canada–U.S. relations are not just tit-for-tat on trade, but also comparative. While the federal government in the U.S. passed a major tax overhaul at the end of 2017, the federal government in Canada has been reluctant to take steps to make Canadian businesses more competitive in terms of taxation. The Liberals are honoring a commitment to further reduce Canada’s small business tax rate, but overall corporate taxes will be high on the agenda of an Opposition party looking to differentiate itself. The Liberals will have to balance the opportunity to provide an indirect stimulus to the economy with paying for programs and projects they can share directly with interests that they are aligned with ideologically.

The government is clearly waiting for the opposition to align itself more closely with the U.S. administration, which is a major risk given that the president is seen exceptionally negatively by the vast majority of Canadians. The Conservatives may make the case that only they can handle working collaboratively with the administration in the U.S.

It remains to be seen how long either party can wait for the other to make its decisive move. The polls are showing that if the tables do not turn soon, the Conservatives will have to find traction soon on their own or take the gamble and hope economic uncertainty catches up with the government.
The government knows that it has made few friends in the business communities beyond the high-tech sector. Many members of the Liberal caucus have pushed the Cabinet to emphasize ways to reduce the cost of doing business, making it easier to hire employees, and encourage easier business transitions. They know that the party’s success could hinge on being able to make the case that it can do more than ride the wave of strong growth.

While Minister Freeland puts a bow on the USMCA, her colleagues Minister Jim Carr (International Trade), Minister Amarjeet Sohi (Natural Resources), and Minister Francois-Philippe Champagne (Infrastructure) will aim to steer through the pipeline issue while looking to cement other trading blocs and build ties with emerging economies. Since the United States pulled out of the Trans-Pacific Partnership, Canada is now the second-largest economy in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The new agreement has been fast-tracked in the House of Commons and will lead to tariff elimination when Canadian businesses export industrial equipment like air and liquid pumps; valves and pipes for boilers; compressors; construction equipment parts; lifting, handling, loading or unloading machinery; moving, grading and leveling machinery; and self-propelled bulldozers and other graders. Canadian exports of industrial goods to other partner countries stand in excess of $20 billion annually.